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June 13, 2012
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The Supply Chain Economy

I will admit it: I am somewhat obsessed, and scared, about the seemingly never ending saga of what is going on in the financial sector in Europe right now. The reason is frankly that there is a reasonable chance there will be a dramatic meltdown in Europe that will deliver the world economy a substantial blow, affecting our businesses and our personal finances.

I have always found supply chain professionals are very interested in what is going on in the economy. Whether that is for personal or professional reasons I am not sure, but we know that what our supply chains need to do at any point in time is highly dependent on economic conditions.

GILMORE SAYS:

"Despite those high rates of recent quarterly production growth, did you know that total US industrial output is about 3% below its 2007 level?"

So back to my concern with Europe. To those that do not follow this, individual countries such as Greece, Spain, Italy and others are struggling to manage their high levels of debt and rising interest rates on that debt. They can't print money to deal with this predicament, as has often been the case in the past, because a country can't print its own money with a common Euro currency. They also can't just default on the bonds they created because European banks own most of those bonds, and a default would take those banks under. It is a total mess.

Just watch CNBC for a few hours on any given day and you will see a wide variety of opinions, from looming Armageddon to manageable challenge if Germany just finally agrees to bailout Greece, Spain and others. Many think it won't.

Personally, I believe this is not going to end well. I am praying it doesn't conclude as badly as the Lehman Brothers crash did here in 2008. Not to be the bearer of bad news, but some think this will lead to a major depression in Europe that will infect the global economy - maybe as soon as this summer. This threat is very real! Get on top of it personally and professionally.

This really is a supply chain issue as well. Most of Europe is already in recession, confounding previous demand forecasts and hurting US exports - and Chinese exports even more. A recent article in the Wall Street Journal noted that US companies are already reacting. They are changing supply contracts to US dollar terms, for example, protecting against the falling Euro value and even worse, some countries potentially leaving the Euro for their own currencies that would hold just a fraction of the Euro value. Many are shortening payment terms to further reduce risk.

CNBC noted last week that "Gripped by fears that Europe's debt crisis is driving the world economy into a ditch, companies are delaying plans to raise capital and canceling deals, while investors are taking refuge in cash or any other place they think their money will be safe."

And make no mistake, the global economy is slowing. As can been seen in the graphic below, global GDP is decelerating. This chart goes through the end of 2011, the last global data I can find, but Europe has gotten worse since then, and formers high flyers China, India and Brazil all reported much weaker than expected growth so far in 2012.

US GDP growth is positive, but much weaker than almost every previous recession. As shown in the graphic below, GPD growth here has also slowed since 2011. We have lately seen GDP growth below the long term rate of 3.4%, and well below the usual post-recession growth levels of 4-8% that enable the average rate to be 3.4% when including recession periods of negative growth.

But it masks how bad things really got during the depths of the recession. Despite those high rates of recent quarterly production growth, did you know that total US industrial output is about 3% below its 2007 level? It has to do with the mathematics that if your stock investment drops 50%, you have to see growth if 100% from there to get back to where you were.

One bit of very good news is that US capacity utilization continues to rise. As shown in our supply chain graphic of the week, capacity utilization in April rose to 79.2%, just a hair below the long run average of 80.3%, and well above the bottom of about 65% in June, 2009, the lowest level since the Great Depression.

The result of all this has been a flight to the dollar. Incredibly, 10-year treasury notes fell below 1.5% interest rates this week. To put that in perspective, if you were lucky enough to have $10 million in cash, you would make a whopping $150,000 in interest income annually from US treasuries. Wow. Two-year bonds pay essentially zero interest. In Germany, two-years have negative interest - you have to pay Germany to lend it money.

That means inventory carrying costs are cheap. Might be worth bulking up inventories that could drive more sales revenues right now. At least look at that question anew.

Despite huge piles of corporate cash, merger and acquisition activity has slowed to a crawl. Don't plan on being bought or sold any time soon.

The weakening global economy, especially in China, combined with the rising value of the US dollar, has led to a collapse in oil commodity prices. Oil is down below $84.00 right now, 20% below where it was just a few weeks ago. Most other commodities are down similar levels. If was me, now is a great time to use hedging strategies to lock in lower input costs.

All I can say is, keep your helmet on. I think it is going to be a tough summer.

Any comments on our summary of the supply chain economy? What should companies do right now? Let us know your thoughts at the Feedback button below.

MAJOR NEW RESEARCH PROJECT

Supply Chain
Execution 2012

Research Questions: What is current state of Logistics/Supply Chain Execution Technology (WMS, TMS, Visibility, etc.)? What are the Key Trends in Adoption? How Prevalent is new SCE "Platform" Thinking?

Can you please help by taking this quick 10 minute survey? All respondents will receive a summary of the data in just a few weeks.

Tuesday, June 19, 2012

Now Available On Demand

YOUR FEEDBACK

Just catching up on a few of the many emails we get each week. Our feedback of the week comes from Paul Dowler of Lenavo, relative to our recent SCDigest Letter on Supply Chain Visibility.

Also publish a letter on the "Undercover Boss" episode that found working conditions in the DC are pretty tough, and some interesting comments on Amazon.com's surprise acquisition of Kiva Systems earlier this year.

Feedback of the Week - Supply Chain Visibility:

The "visibility hub" that you refer to in your visibility framework graphic reminds me of U.S. Department of Defense efforts to provide a "common operating picture" (COP) of supply chain activities associated with the various types of military campaigns.

The complexity associated with viewing and coordinating countless types of material inflows and outflows (from food, to bullets, to tanks) and collaborating with multiple stakeholders (military from partner nations, NGOs, in-country local population, etc.) is second to none. If you cross paths with senior DOD officials, it might be worthwhile for you to ask about their insights on DOD's progress in developing a common operating picture capability to support their campaign efforts.

- Appreciate the work that you do @ SC Digest to keep our field abreast with information from outside each of our respective "4 walls."

Paul Dowler
Global Supply Chain Strategist
Lenovo

More on Visibility:

Thank you for your excellent Supply Chain Digest Letter on Supply Chain Visibility. It is the finest work I have seen on this critical topic.

I think the Visibility hub is an intriguing idea. If such a technology could really be developed, it would dramatically change the practice of supply chains.

The concept of Perfect Logistics is also intriguing.

Rob Delano

On Amazon Buys Kiva Systems:

I suspect most dot.com competitors will be reluctant to buy a this kind of technology from and then have to rely on Amazon for future support of it. So perhaps Amazon strategically feels this purchase will keep game-changing innovative technology out of the hands of its competitors.

Dr. Larry Lapide
MIT

Most of the cost driver in installing a KIVA system is in building the storage pods if you have a large SKU base. The costs of implementing KIVA in a large sku/small order sized environment like Amazon has plays directly to the strength of KIVA. KIVA will be comparable in price to set up in a facility to conventional racks, bins, and conveyors. The long term savings in conveyor maintenance and labor costs (KIVA is all goods-to-man) are significant, especially if you are able to get the installs at cost by owning the company.

KIVA also only requires about a 9 foot clear ceiling height and the product can be moved from one warehouse to a new warehouse over a weekend. This allows Amazon to consider lower cost lease buildings (anybody got an empty mall?) for site location and gives them the ability to rapidly move to another site with minimal cost should the lease costs get too expensive. No more being held hostage by a landlord because he knows it would cost you a couple of million to tear down and move an operation to a different site or that the business could not afford the disruption.

Amazon also received a lot of bad press over the past year regarding heat and working conditions in some of it's warehouses. Robots don't require air conditioning. It is much cheaper to install fans and control the environment at the pick stations than to pay for cooling an entire warehouse.

$775M may seem like a lot but in the end it will turn out to be a bargain for Amazon.

Often times in much of the country, warehouse facilities are kept at ambient temps- marketplace ROI's rarely justify climate control. That being the case, the warehouse is hot in the summer and cold in the winter. It can be grueling- try stripping a floor loaded Boxcar filled floor to ceiling with 50 lb bags of dog chow on a hot July afternoon.

Longer rest periods and liquids are highly advised! Warehouses can be a bit dusty too. Heck, I even recall the days when we had to ink-stencil the LTL freight after order selection before the proliferation of PC-based printers and adhesive labeling. That ink ruined many a shirt or pant! So, many will consider that to be lousy duty understandably.

The question though is what is the path to progression beyond this level? Is the leadership, training, methods, equipment, uniforms and so on supportive so there is at least a professional, team oriented environment? Desk jobs can be lousy too!

Tom Miralia
President & CEO
Distribution Technology

SUPPLY CHAIN TRIVIA ANSWER

Q: How much did the average West Coast Longshoreman (port worker) take home in 2011?

A: $129,932, according to stats from the Pacific Maritime Association last week. That includes overtime pay, but not benefits.